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"Israeli measures also risk radicalising the hitherto relatively quiescent Palestinian population of East Jerusalem," the EU report said.

It concluded a two-state solution is being eroded by Israel's "deliberate policy," which is in breach of international law.

The document has been prepared by British and EU representatives in Jerusalem and Ramallah under the British EU presidency.

The 11-page paper was presented to EU foreign ministers in Brussels earlier this week, but they vetoed a planned publication of the study.

Ministers decided to delay the release in order not to damage the recent warming up of relations between Israel and Europe, including the launch of the first European Union police mission to the area.

On Saturday EU observers are expected to start monitoring Plaestine's Rafah crossing between Egypt and Gaza.

Israel is making it increasingly harder for Palestinians to travel between East Jerusalem and the West Bank, the report pointed out.

"Israel's main motivation ... is almost certainly demographic - to reduce the Palestinian population of Jerusalem, while exerting efforts to boost the number of Jewish Israelis living in the city," the paper stated.